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Chapter 17: Q. 17.2 (page 374)

Describe an inverse relationship between inflation and unemployment.

Short Answer

Expert verified

Both unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a reduction in the unemployment rate.

Step by step solution

01

Step :1 Introduction  

In light of the stagflation that the Indian economy has been experiencing recently, the inverse link between inflation and unemployment is generally considered as validation of the theory that inflation helps the economy run at its maximum capacity."

02

Step :2 Explanation 

Unemployment and inflation Inflation is caused by an unexpected increase in aggregate demand, which results in a decrease in the unemployment rate. As a result, the inflation rate and the unemployment rate should be inversely related. The Philligs curve will shift outward if consumers expect efforts to exploit this Philigs curve trade off to enhance inflation.

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Most popular questions from this chapter

Consider Figure 17-5, and suppose that the economy initially operates at point A, at which the inflation rate is 0percent and the unemployment rate is 6percent, which is the natural rate of unemployment. In the long run, will an increase in the inflation rate to 3percent result in the economy operating at point Bor at point F1? Explain your reasoning.

The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. Make lists of possible factors affecting workers and firms that you believe are likely to influence the natural rate of unemployment.

Take a look at Figure 17-3. Explain whether the cyclical unemployment rate is positive, zero, or negative at point E2, after the shift in the aggregate demand curve from AD1to AD2. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at point E3the shift in the short-run aggregate supply curve from SRAS1to SRAS2.

Suppose that economists were able to use U.S. economic data to demonstrate that the rational expectations hypothesis is true. Would this be sufficient to demonstrate the validity of the policy irrelevance proposition?

Consider the diagram below, which is drawn under the assumption that the new Keynesian sticky-price theory of aggregate supply applies. Assume that at present, the economy is in long-run equilibrium at point A. Answer the following questions.

a. Suppose that there is a sudden increase in desired investment expenditures. Which of the alternative aggregate demand curves- AD2or AD3-will apply after this event occurs? Other things being equal, what will happen to the equilibrium price level and to equilibrium real GDP in the short ran? Explain.

b. Other things being equal, after the event and adjustments discussed in part (a) have taken place, what will happen to the equilibrium price level and to equilibrium real GDP in the long run? Explain.
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